By: HUB’s EB Compliance Team

Prior to the Affordable Care Act (“ACA”), rather than offer their own group health plans, some employers would simply reimburse (or contribute to) the cost of individual coverage obtained by the employee. The ACA and potential for IRS penalties largely put an end to this practice. However, over time these rules have been relaxed to allow employers to use Individual Coverage HRAs (“ICHRAs”), among other vehicles, to contribute towards the cost of individual coverage. Although these can be useful options for employers to consider, given the plethora of rules, they must also be aware of the potential pitfalls in offering ICHRAs.

Failing to Understand the Authorized Classes

The rules allow employers to offer an ICHRA to all eligible employees, or only select employees in certain authorized classes (or a combination of classes). If the employer is either looking to offer the ICHRA to certain portions of their population, or potentially offer the ICHRA to all eligible employees, but under different terms to certain employees, they must be aware of the specific authorized classes allowed. Employers may only use these specific classes.

Common classes employers use are full-time/part-time, salaried/non-salaried, and employees whose primary site of employment are in the same ACA rating area. While there are other allowable classes, these are the most common ones used by employers. Noticeably missing from the authorized classes are managers/non-managers, executives/non-executive, and Medicare eligible/non-eligible, some of which employers might prefer to use. Employers may be able to use authorized classes to include all, or a portion of these unauthorized classes. For example, while employers cannot use managers as a class when offering an ICHRA, they can use salaried employees, which may well include managers.

Failing to Understand Minimum Class Size Rules

Once an employer determines which authorized class or classes to use when offering an ICHRA, they must ensure they meet the minimum class size rules, described below (where applicable).

  • For employers with fewer than 100 employees, the class must be at least 10 employees
  • For employers with 100 to 200 employees, the class must be at least 10% of the employees
  • For employers with more than 200 employees, the class must be at least 20 employees

Notably, these minimum class size rules only apply if the employer is offering a traditional medical plan to other employees. In other words, if the ICHRA is the only group health plan that the employer offers, the employer does not have to meet these minimum class size rules. For this purpose, an “employer” includes all entities in the employer’s controlled group.

These rules are designed to ensure employers do not creatively use authorized classes in a way that only impacts a small portion of the population. Thus, even if the employer is using authorized classes, if the class sizes do not meet the minimum class size requirements, the ICHRA is not compliant.

Failing to Understand Rating Areas

The ACA requires each state to have a set number of geographic rating areas that all issuers in the state must uniformly use as part of their rate setting. Essentially this means the rates for a specific plan in a specific rating area will be the same for individuals of the same age, gender and tobacco use status. For example, A and B may live at opposite ends of a given rating area, however if both are 45-year-old female, non-tobacco users, their rates for a given health plan will be the same.

Metro areas may be comprised of multiple rating areas. For example, the Chicago metro area is comprised of no less than four rating areas in Illinois alone (not counting parts of the metro area in Northwest Indiana, and Southeast Wisconsin). Employer contributions to ICHRAs may vary based on rating area, as the underlying rates can vary, even between neighboring rating areas. However, unless the rating area used is an entire state (or two or more states), each rating area would need to individually satisfy the minimum class size requirements. Thus, employers must be conscious of the rating areas used for determining ICHRA contributions.

Failing to Comply with Substantiation Requirements

Employees are not taxed on amounts employers contribute towards ICHRAs. However, employees are required to substantiate that they actually have individual coverage to receive the employer contribution. Substantiation must be done each month to prevent employees from receiving employer contributions for coverage that is no longer in place.

The substantiation requirement means employees must pay the entire premium before they can receive the employer contribution. This may be a financial challenge for certain employees to pay a full premium, even if the employer ultimately pays a significant portion of the premium. Financial hardships for employees do not allow employers to avoid the substantiation requirements. Some ICHRA administrators however allow for direct payment of premiums through payroll, thus meeting the substantiation requirement by directing payment from the employer directly to the applicable carrier(s).

Failing to Understand COBRA Applicability

ICHRAs and traditional HRAs are both subject to COBRA. This means employees who are enrolled in an ICHRA at the time of termination or reduction of hours will be eligible to continue their ICHRA through COBRA if they lose coverage. Unlike a traditional group health plan, enrolling in COBRA for an ICHRA does not maintain the underlying health coverage. This has led to much confusion on the part of both employers and employees.

With a traditional group health plan, a former employee who experiences a COBRA qualifying event enrolls in COBRA, pays the premium and continues their group health coverage. With an ICHRA, electing COBRA and paying the premium only entitles the former employee to receive the employer contribution to the ICHRA. To keep the underlying individual policy in force, the employee must still pay the individual premium by the deadlines prescribed by the carrier. These deadlines are completely separate from deadlines employees have to elect and pay for COBRA.

Conclusion

ICHRAs can be a very helpful tool in the employer’s benefits “toolbox”. However, employers must take into account these common pitfalls before implementing an ICHRA so they can properly evaluate whether and how it fits into their overall benefits strategy.

If you have any questions, please contact your HUB Advisor. View more compliance articles in our Compliance Directory.

NOTICE OF DISCLAIMER

Neither Hub International Limited nor any of its affiliated companies is a law or accounting firm, and therefore they cannot provide legal or tax advice. The information herein is provided for general information only and is not intended to constitute legal or tax advice as to an organization’s or individual's specific circumstances. It is based on Hub International's understanding of the law as it exists on the date of this publication. Subsequent developments may result in this information becoming outdated or incorrect and Hub International does not have an obligation to update this information. You should consult an attorney, accountant, or other legal or tax professional regarding the application of the general information provided here to your organization’s specific situation in light of your or your organization’s particular needs.